Are you ready?
The Financial Accounting Standards Board (FASB) Accounting Standards Codification™ (ASC) significantly changes the structure and hierarchy of accounting standards. Are you as familiar with it as you need to be? Read on for a description of FASB ASC, as well as a list of useful resources.
FASB ASC Overview
FASB ASC is a major restructuring of accounting and reporting standards designed to simplify user access to all authoritative U.S. generally accepted accounting principles (GAAP) by providing the authoritative literature in a topically organized structure. FASB ASC disassembled and reassembled thousands of nongovernmental accounting pronouncements (including those of FASB, the Emerging Issues Task Force [EITF], and the AICPA) to organize them under approximately 90 topics. FASB ASC also includes relevant portions of authoritative content issued by the SEC, as well as selected SEC staff interpretations and administrative guidance issued by the SEC; however, FASB ASC is not the official source of SEC guidance and does not contain the entire population of SEC rules, regulations, interpretive releases, and SEC staff guidance. Moreover, FASB ASC does not include governmental accounting standards.
Although the FASB ASC project was not intended to change U.S. GAAP or any requirements of the SEC, it is a major restructuring of accounting and reporting standards in U.S. GAAP. FASB ASC significantly changes the way financial statement preparers, auditors, and academics perform accounting research.
FASB Statement No. 168
In June 2009, FASB issued the last FASB Statement referenced in that form: FASB Statement No. 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162. This standard establishes FASBASC as the source of authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to guidance issued by the SEC, and is effective for financial statements issued for interim and annual periods ending after September 15, 2009.
This standard flattened the historic U.S. GAAP hierarchy to two levels: one that is authoritative (in FASB ASC) and one that is nonauthoritative (not in FASB ASC). Exceptions include all rules and interpretive releases of the SEC under the authority of federal securities laws, which are sources of authoritative U.S. GAAP for SEC registrants, and certain grandfathered guidance having an effective date before March 15, 1992.
The GAAP hierarchies of nongovernmental, state and local governments, and federal governments previously resided in Statement on Auditing Standards (SAS) No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles, in the auditing literature. The FASB, Governmental Accounting Standards Board, and Federal Accounting Standards Advisory Board each issued standards to incorporate its own GAAP hierarchy into its own authoritative literature. As such, SAS No. 69 was withdrawn in September 2009, which coincided with the effective date of FASB Statement No. 168.
Although the FASB ASC project was not intended to change U.S. GAAP, guidance previously included in Technical Questions and Answers (TIS) paragraphs .38-.76 of TIS section 5100, Revenue Recognition (AICPA, Technical Practice Aids) as nonauthoritative guidance is now included in FASB ASC as authoritative; essentially elevated in level of authority. While public nongovernmental entities should have already followed this guidance, nonpublic nongovernmental entities may not have. For those nonpublic nongovernmental entities that did not previously follow this guidance, they should account for the adoption of that guidance as a change in accounting principle, on a prospective basis, for revenue arrangements entered into or materially modified in those fiscal years beginning on or after December 15, 2009, and interim periods within those years. If an accounting change results from the application of this guidance, an entity should disclose the nature and reason for the change in accounting principle in their financial statements.
The Future of Standard Setting
Going forward there will no longer be, for example, accounting standards in the form of statements, staff positions, EITF abstracts, or Accounting Statements of Position. Instead, FASB will issue Accounting Standards Updates (ASUs) to FASB ASC. FASB will not consider the ASUs as authoritative in their own right. Instead, they will serve only to update FASB ASC which is the authoritative source of U.S. GAAP. New guidance will be in the form of ASU No. 20YY-XX, in which “YY” is the last two digits of the year and “XX” is the sequential number for each update. For example, ASU No. 2010-01 is the first update in the year 2010. New standards will include the standard and an appendix of update instructions. ASUs will also provide background information about the guidance and provide the basis for conclusions on changes made to FASB ASC.
For any guidance that is not yet fully effective, that content is reflected as “Pending Content” in FASB ASC. All pending content is clearly noted as such and also includes links to the transition information. When that guidance becomes fully effective, the outdated guidance will be removed, and the amended paragraph will remain. FASB will keep any outdated guidance in the applicable archive section of FASB ASC for historical purposes. Entities cannot disregard pending content. Instead, entities must review the transition guidance to determine if and when the guidance is applicable to them.
Accessing FASB ASC
FASB ASC is available in both a Basic View and a Professional View. The Basic View offers users basic printing and topical browsing functionality, as well as a utility to identify the location of legacy standards, and is free; the Professional View offers expanded functionality for an annual fee of $850. Both views are available at http://asc.fasb.org/home. First time users will have to choose a view and create a username and password. Once you are registered, you simply need to visit this site and log in to access FASB ASC (whichever view you choose). For more information on the two views and to order, see https://www.fasb.org/store/subscriptions/fasb/new.
FASB ASC Topical Structure
FASB ASC effectively organizes accounting and reporting guidance without regard to the original standard setter or standard from which the guidance was derived. FASB ASC uses a topical structure in which topics, subtopics, and sections are numerically referenced as follows:
- Topics. FASB ASC 310 to access the Receivables topic
- Subtopics. FASB ASC 310-10 to access the “Overall” subtopic of topic 310
- Sections. FASB ASC 310-10-15 to access the “Scope and Scope Exceptions” section of subtopic 310-10
- Paragraph. FASB ASC 310-10-15-2 to access paragraph 2 of section 310-10-15
Referencing FASB ASC
You should consider how and when your entity will begin referencing FASB ASC in your documentation (policy and procedures, technical memorandums, financial statements and filings, engagement working papers, and so on). It is only prudent to reflect current U.S. GAAP in your documentation. The FASB ASC Notice to Constituents (NTC) describes how to reference FASB ASC in financial statements and other documents.
In working papers, articles, textbooks, and related items, FASB recommends using the detailed numerical referencing system as described previously. For example:
“Under FASB ASC 820-10-35-18, ABC Entity is required to use its own credit spreads in determining the current value for its derivatives liabilities and all other liabilities for which it has elected the fair value option.”
However, when referencing FASB ASC in financial statements, such as in footnote disclosures, FASB encourages the use of plain English to describe broad FASB ASC topic references. For example:
“As required by the Fair Value Measurements and Disclosures Topic of FASB ASC, ABC Entity is required to use its own credit spreads in determining the current value for its derivatives liabilities and all other liabilities for which it has elected the fair value option.”
Additionally, in many cases entities may find it more useful for users to describe the specifics of the accounting policy applied rather than simply give the FASB reference. For example, a clear description of an entity’s accounting policies for share-based payment arrangements would often be more relevant to financial statement users than a general statement that the entity follows FASB ASC 718, Compensation—Stock Compensation.
There may be times when you need to reference certain grandfathered guidance that is not included in FASB ASC (FASB Statement No. 168 includes a listing of grandfathered guidance). The FASB ASC NTC explains that in those situations, use of the old terminology would still be appropriate.
Referencing FASB ASC in Financial Statements
FASB Statement No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The following information explains what that means depending upon if an entity is a nonpublic or public entity:
- Nonpublic entities. For nonpublic entities without interim filings, financial statements should reference FASB ASC for the first annual period ending after September 15, 2009. For example, a nonpublic entity with a December 31, 2009, year-end should reference FASB ASC in its financial statements.
- Public entities. For public entities, financial statements should reference FASB ASC for the first interim and annual periods ending after September 15, 2009. Therefore, a public entity filing financial statements for the quarter ended September 30, 2009 should reference FASB ASC in its financial statements.
Like the FASB, the SEC encourages entities to use plain English references to describe broad FASB ASC topic references and avoid specific U.S. GAAP references to make financial statements more useful to users and to more clearly explain accounting concepts. The SEC provides that FASB ASC references should be on a consistent basis for all periods presented. The SEC does not expect public companies to revise or amend financial statements previously filed for prior periods simply because financial statements for periods ending after September 15, 2009 refer to FASB ASC. That is, an entity’s December 31, 2008 Form 10-K, with references to only pre-Codification U.S. GAAP literature, may be incorporated by reference into a Form S-3 registration statement that becomes effective after September 15, 2009, even if the Form S-3 also incorporates by reference the September 30, 2009 Form 10-Q that references FASB ASC. The SEC has also stated that they will not require a preferability letter if an accounting change is in response to a newly issued update of FASB ASC. Because FASB ASC is not the official source of SEC guidance, public entities should not use FASB ASC references for SEC content, but rather continue to reference the applicable SEC rule or regulation (e.g., Regulation S-X or a Staff Accounting Bulletin).
For further information on the SEC views on FASB ASC, see the Center for Audit Quality (CAQ) Alert 2009-76 at http://thecaq.org/members/alerts/CAQAlert2009_76_08172009.pdf.
Referencing FASB ASC in Engagement Working Papers
Audit, attest, or compilation and review working papers associated with financial statements for a period ending after September 15, 2009, also should reflect FASB ASC because the underlying financial statements, which are the subjects of those engagements, reference FASB ASC.
SEC Response to FASB ASC
On August 18, 2009 the SEC issued Interpretive Release No. 33-9062A, Commission Guidance Regarding the Financial Accounting Standards Board's Accounting Standards Codification. The release instructs statement preparers, auditors, and investors that as of September 15, 2009, “references in the commission’s rules and staff guidance to specific standards under U.S. GAAP should be understood to mean the corresponding reference in the FASB Codification.”
As a result of the launch of FASB ASC, the SEC said it plans to start a long-term project “to revise comprehensively specific references to specific standards under U.S. GAAP in the commission’s rules and staff guidance.”
“The FASB Codification does not supersede commission rules or regulations,” said the SEC in Release No. 33-9062. “We understand that the FASB Codification, as a service to users, includes references to some commission rules and staff guidance. However, the FASB Codification is not the authoritative source for such content, nor does its inclusion in the FASB Codification affect how such content may be updated in the future.”
The interpretive guidance is effective upon publication of the release in the Federal Register, on August 25, 2009. See http://www.sec.gov/rules/interp.shtml for further information.
PCAOB Publishes Q&As on FASB ASC
On September 22, 2009, the PCAOB published staff questions and answers about references to authoritative accounting guidance in PCAOB standards. The series of Q&As serves as a reminder that auditors should look to FASB ASC and SEC rules for authoritative U.S. GAAP guidance for SEC registrants, even though PCAOB standards may contain descriptions of and references to U.S. GAAP as it existed prior to FASB ASC.
Questions addressed include:
- Certain PCAOB standards include descriptions of and references to U.S. GAAP and accounting requirements. What is the status of those descriptions of and references to U.S. GAAP and accounting requirements upon the effective date of FASB ASC?
- What is the auditor's responsibility if, in using FASB ASC, the auditor believes that an item in the financial statements should be accounted for differently under FASB ASC than under pre-Codification U.S. GAAP?
- What are the other responsibilities of an auditor with respect to FASB ASC?
- What consideration, if any, should an auditor give to descriptions of and references to U.S. GAAP in the standards of the PCAOB if he or she is auditing the financial statements of a foreign private issuer prepared in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board?
The Q&As are available at: http://www.pcaobus.org/Standards/Staff_Questions_and_Answers/2009/09-02_FASB_Codification.pdf.
XBRL Functionality in FASB ASC
On October 2, 2009 FASB released new XBRL functionality. The FASB ASC website now provides lists of all U.S. Financial Reporting Taxonomy XBRL elements that contain an electronic link to a FASB ASC paragraph and all such electronic links within a subtopic. A listing of XBRL elements used within each topic is located in the 75 and S75 (for SEC guidance) sections of FASB ASC.
FASB Resources
- FASB homepage. Find all of the latest information regarding the release of FASB ASC, a summary and the full text of FASB Statement No. 168, as well as a link to the FASB ASC homepage. Exposure Drafts and ASUs are also accessible from the FASB Web site.
- FASB ASC Web site. The official Web site for FASB ASC. Upon registering for either the basic view or the professional view version, you can then access the codified content and provide feedback to FASB using your registered username and password.
- FASB ASC NTC. Explains the scope, structure, and usage of consistent terminology of FASB ASC. Constituents are encouraged to read this NTC because it answers many common questions about FASB ASC.
- Other resources. Many valuable FASB ASC resources, including FASB ASC updates, webcasts, and press releases. It also includes information on the two different FASB ASC views, including pricing for the professional view.
AICPA Resources
- FASB ASC PowerPoint presentation. This presentation is designed to help you educate members in your organization about FASB ASC. It will help them understand the purpose, meaning, and structure of FASB ASC; how to use FASB ASC; available resources; and what they need to know to start using FASB ASC.
- The FASB Accounting Standards Codification™ Q&A.
- AICPA Resource Accounting Guidance Library. Available to AICPA members only, this library includes FASB ASC with advanced functionality similar to the FASB’s professional view. It also includes seven of the AICPA’s most popular Audit and Accounting Guides.
- AICPA Audit and Accounting Guides. Order your 2009 AICPA Audit and Accounting Guides today! The following guides have been updated to reflect FASB ASC and are available now to help you make the transition:
- Updated 2009 Audit and Accounting Guides available for purchase
- Audit Guide Auditing Revenue in Certain Industries
- Audit and Accounting Guide Construction Contractors
- Audit and Accounting Guide Depository & Lending Institutions
- Audit and Accounting Guide Employee Benefit Plans
- Audit and Accounting Guide Investment Companies
- Audit and Accounting Guide Life & Health Insurance Entities
- Audit and Accounting Guide Not-for-Profit Entities
- Audit and Accounting Guide Property & Liability Insurance Entities
- Watch for these updated 2009 AICPA Audit and Accounting Guides
- Audit Guide Auditing Derivative Instruments, Hedging Activities, and Investments in Securities
- Audit and Accounting Guide Brokers & Dealers in Securities
- Audit and Accounting Guide Health Care Entities
Visit the AICPA online store for these and other products updated for FASB ASC.